About UCLA Anderson Global Supply Chain Blog
This blog is developed by the Decisions Operations and Technology Management (DOTM) Faculty at the UCLA Anderson School as well as special guests. It is intended to report, analyze, and comment on events that relate to current Global Supply Chain Management issues. Each blog is presented in English, (Simplified) Chinese, and (Castilian) Spanish, and it can take one of the following formats:
(a) An Interview -- the author formulates questions about a current issue, and the interviewee provides commentary.
(b) An insight -- the author provides insights concerning global supply chains, including current events.
(c) An analytical piece -- the author analyzes a particular supply chain issue and formulates descriptive and/or prescriptive views.
For more information on the blog contributors, check the DOTM website.

An ever-increasing number of the world’s largest firms respond to the detailed annual questionnaire administered every year by CDP, formerly known as the Carbon Disclosure Project, providing information about their risks and opportunities related to climate change. While most of the questionnaire focuses on what is happening within the firm itself, some of the questions relate to the firm’s supply chain. To distinguish between these “own” emissions and those elsewhere in the supply chain, the Greenhouse Gas (GHG) Protocol distinguishes between three types. Scope 1 emissions occur on-site at the firm itself, Scope 2 emissions are the direct result of electricity purchased by the firm, and Scope 3 emissions are those that are embedded in the products and services that a firm purchases. (Sometimes Scope 3 also refers to emissions further downstream in the supply chain, not only upstream, but here we focus on upstream emissions only.)

Firms are not obliged to respond to the CDP questionnaire, but many do, with widely varying degrees of completeness. In 2013, 334 firms in the S&P 500 index did respond publicly. In total, 397 US firms responded in 2013, reporting approximately 1.5 billion tons of CO2-equivalent (CO2-e) GHG emissions within their Scope 1 and 2. (There are several different greenhouse gases, emissions of which are commonly aggregated into a single metric expressed in terms of an equivalent amount of carbon dioxide (CO2) emissions.) However, it is widely understood that, for most firms, the majority of their emissions are further upstream in the supply chain. Walmart may have significant emissions due to their retail stores, distribution centers, and logistics operations, but the emissions in their upstream supply chain dwarf Walmart’s own. The same is true for many other firms: the emissions embedded in the components or services they purchase greatly outweigh their own.

Estimates in the literature (see Matthews et al. 2008) suggest that, for the average sector, Scope 3 accounts for 74% of its total footprint. How does that compare to what firms are actually reporting?

The CDP questionnaire does ask firms to disclose their Scope 1, 2 and 3 emissions. The reports for Scope 1 and 2 are expected to be reasonably accurate, but it is understood that when firms report Scope 3 emissions, there is no claim that that report is complete; firms often just pick one or two categories, such as “business travel”, and only report emissions in that category.

Of the 397 US firms that responded publicly to the CDP questionnaire in 2013, 265 reported at least some Scope 3 emissions. Those firms reported approximately 700 million tons of CO2-e in Scopes 1 and 2, and 600 million tons of CO2-e in Scope 3. How should we interpret that Scope 3 number, given that we know it is widely understood to be incomplete?

Let’s assume that the estimate in Matthews et al. (2008) is correct, and that, on average, Scope 3 emissions are 74% of the total. That means that Scope 3 emissions should be larger than the Scope 1 and 2 emissions, by a factor 0.74 / (1-0.74) = 2.85. In other words, if a firm reports 10 million tons of CO2-e for Scope 1 and 2 in 2013, one would expect that firm’s Scope 3 emissions to be 2.85 x 10 million = 28.5 million tons CO2-e. When we look at firms that did disclose some Scope 3 emissions, we find that, on average, their Scope 3 emissions were only 39% of their total disclosed for 2013. In other words, a firm that disclosed 10 milllion tons of CO2-e in Scopes 1 and 2, disclosed on average 0.39 / (1-0.39) x 10 million = 6.4 million tons of CO2-e in Scope 3. We just saw that, based on the estimated breakdown in Matthews et al. (2008), we would expect to see 28.5 million tons, so the average firm is only reporting 6.4 / 28.5 = 22% of their actual Scope 3 emissions.

We should emphasize again that there is absolutely no wrongdoing here, as there is no expectation or claim that the Scope 3 reports are complete. If anything, the 265 firms who at least report some Scope 3 emissions should be commended for their transparency, even if the reports are incomplete. There are several likely reasons for this discrepancy. First, and most obviously, it is likely that firms do indeed under-report their Scope 3 emissions. Many firms are explicit about that, indicating which categories of emissions they include, hence by extrapolation also indicating which categories they do not. Second, even firms that do disclose Scope 3 emissions are unlikely to go multiple levels upstream in the supply chain, as the estimate by Matthews et al. (2008) does. There are various other measurement issues that likely contribute to this effect, though some may make the extent of under-reporting even larger than we estimated.

All in all, it is not possible to take one individual firm’s Scope 3 emissions report, and “fill in” the missing emissions. Based on our estimate, though, it does appear that even the most advanced firms are not (at least not publicly) capturing a large portion of GHG emissions in their supply chains, and hence likely to be missing substantial opportunities to reduce their supply chain carbon footprint.

CDP itself believes that, despite some firms’ efforts to respond to the annual survey, Scope 3 emissions “[...] are not being addressed sufficiently by most companies”[2], and our analysis is consistent with that. Keeping in mind that carbon emissions may be one of the best-measured aspects of sustainable supply chains, much more so than for instance water or social impacts, this suggests that even with all the good intentions and initiatives already underway, many firms have a long way to go before they can claim to know how sustainable their supply chains are, let alone claim to actually have a sustainable supply chain.

[1] This post is based on the recent article by Christian Blanco, Felipe Caro, and Charles J. Corbett, “The state of supply chain carbon footprinting: analysis of CDP disclosures by US firms”, Journal of Cleaner Production 135 (2016), pp. 1189-1197. Our analysis makes many assumptions and has several limitations and caveats, which are discussed in more detail in that article.

[2] CDP 2015, “Committing to climate action in the supply chain”, p. 2; available through https://www.cdp.net/en/reports/archive, last accessed November 10, 2016.